Another Superpower of Apple – Pricing Strategy

You’ll be hard-pressed to find a market in which customer preference is homogeneous. People and companies have different wants and needs. Such ​heterogeneity is a powerful force driving a company’s product and pricing strategy. A “one-size-fits-all” approach is bound to fail, but on the other hand, it’s exceedingly difficult to get the right product to market at the right price. Price a product too low and a business will leave money on the table. Price it too high and competitors will swoop in to take market share. Successful businesses are those that manage to meet diverse customer needs with different products at varied price points. Apple is among the best in the world at that.

Believe it or not, Apple has a complex portfolio of products. Every model has multiple configurations sold at different prices. For the sake of simplicity, I catalogued only the lowest price point of each model of five major product lines: iPhone, Mac, iPad, Apple Watch and AirPods. Furthermore, I included only the current models that Apple sells on its official store at Apple.com and excluded all the refurbished versions. Here is what the pricing schemes look like:

Apple's Pricing Schemes For Major Products
Figure 1 – Apple’s Pricing Schemes For Major Products

Obviously, Apple doesn’t adopt the one-size-fits-all approach. Every product line has several variations. There is an entry-level option that satisfies the basic needs of customers who do not wish to splurge a big amount on a gadget. Take iPhone SE as an example. It has Touch ID instead of the more trendy Face ID as an authentication feature. It comes with Bionic A15 instead of the latest A16 chip. There are several other compromises, but compared to iPhone 5 or even 6 a few years ago, I bet the current SE is still a much better phone. Since the iPhone SE features must already satisfy the needs of low spenders, why would Apple need to add more unwanted features and price itself out of this customer segment?

On the other side of the spectrum, the most sophisticated users have niche preferences and are willing to pay for products that can deliver accordingly. Mac Pro is a too powerful and too expensive computer if you just want to use it for Web surfing and Office 365. However, it would be a great choice for those who need a lot of computing power for their professions. Apple Watch Ultra costs more than a Mac Mini. It’s too expensive for someone like me who just wants a smartwatch for daily exercises. But for fans of extreme sports, it’s the perfect companion.

In addition, Apple has offers to the “middle class” segment that has a bit more sophisticated needs yet does not wish to pay a lot. Like myself. This pricing strategy enables Apple to appeal to more customer segments and sells more hardware. To them, the most challenging task is to get a customer to join the ecosystem. Once someone gets in, chances are that they will stay for a long time and be primed for Apple to monetize through a myriad of services.

There is also an “anchor pricing” effect stemming from having different tiers. The point is to make your main product stand out by offering lesser alternatives. Let me explain. With $599, users can have a brand new iPhone 12 with the A14 chip. However, they will be tempted to think: if I pay just $100 more, I can have a more powerful chip (A15), theoretically a couple of more hours of battery and some camera features that I may use once in a while. Some may take it further and ponder that because iPhone 14 is $100 more expensive than iPhone 13 yet it has one more GPU, Emergency SOS via satellites, crash detection and several more camera features, is it worth to go all the way? This anchoring effect is even more obvious between iPhone 14 and the Pro versions. The gap between iPhone 14 and iPhone 14 Pro is $200, but the latter has a more advanced chip (A16), a better camera and some software features that Apple really pushes such as always-on display, Dynamic Island & Promotion Technology. I can see why users will be tempted to shell out more money for the Pro versions. In fact, there is already report on high demand for iPhone 14 Pro. I think Apple will continue to use this anchor pricing effect and bring their best updates to the Pro lineup in the future. This way, they can get a higher share of consumer wallet and maximize their top and bottom line.

But such an elaborate pricing strategy doesn’t come cheap. It requires a lot of collaboration, planning and smooth operation from the internal teams. Think of the work that the supply chain team must do to secure the needed parts. Or the planning and execution that the engineering team has to offer so that all products work as intended and carry the right appeal. I bet it’s also very challenging for the revenue management folks at Apple to analyze data and make forecasts. But hey, nothing worth having comes easy, right?

Admittedly, I don’t have any sales data on specific products. However, Apple has seen an increasingly bigger installed base, more paid subscriptions and record revenue. That goes to show that the work Apple puts in has paid dividends.

Apple's Revenue Growth
Figure 2 – Apple’s Revenue Growth
Apple's Paid Subscriptions
Figure 3 – Apple’s Paid Subscriptions

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